Nokia refuses to panic despite worse than expected Q4

by Caroline Gabriel, ReThink Wireless

Nokia’s fourth quarter results sent European stock markets reeling, coming in well below analyst estimates despite already low expectations, which had followed the market leader’s two successive warnings during the quarter. However, the company has the scale and resources to ride out the storm, and was clear that, while it would make cuts, it would not engage in kneejerk cost reductions that could weaken its all-important moves into new markets, such as internet services, that should boost its growth and margins post-recession.

In its fourth quarter, sales dropped by 19% year-on-year to €12.7bn ($16.4bn) and profits were down by a disastrous 69% to €576m ($744m). Consensus analyst forecasts on the eve of the results announcement had estimated profit of €975m on sales of €13.1bn. In other key metrics, unit cellphone sales were down 15% year-on-year, and 4% sequentially, even though Q4 should be seasonally strong (a similar pattern was seen at Apple). The company shipped 113.1m phones, bearing out the warnings of a “very disappointed” Nokia supply chain, as reported in a research note this week by Deutsche Bank.

Nokia’s CEO, Olli-Pekka Kallasvuo, was certainly more downbeat than his fellow Scandinavian Carl-Henric Svanberg, head of Ericsson, who despite a decline in profits said the company was not yet being significantly affected by the downturn. “In recent weeks, the macroeconomic environment has deteriorated rapidly, with even weaker consumer confidence, unprecedented currency volatility and credit tightness continuing to impact the mobile communications industry,” Kallasvuo said.

But he demonstrated his characteristic refusal to panic and said cost cutting would be cautious and that it was “important for Nokia to continue investing at the proper pace for future growth”, highlighting the relative luxury of Nokia’s position, with its huge market share and its case reserves, compared to Motorola’s desperate measures. He said: “We are taking action to reduce overall costs and to preserve our strong capital structure. This is clearly our top priority in the current economic environment. [But] we believe Nokia has a tremendous opportunity to capture value as the internet services market evolves and grows.”

Nokia expects the overall decline of the handset market in Q1 to be steeper than in the same period in the past few years, and though warning of extremely limited visibility, it is now forecasting industry volumes decline of 10% in 2009, twice as bad as its previous guidance of 5% or more. It says it expects to retain or improve its own market share, around 37-39%, and that the global sales decline will be worst in the first half of the year.

Nokia is expected to see some market share decline when all Q4 figures are in, mainly because of declines in MEA, Greater China and some other parts of the Asia-Pacific – largely down to the probably short term impact of ultra-low cost local vendors – and continuing weakness in north America. Sales in Europe were down 6.7% to 34.7m units; in MEA down 23% to 18.2m; in Greater China, down 36% to 12.9m; in north America down 19.6% to 4.1m; and in Latin America down just 0.7% to 13.3m units. In all, that added up to a 15.3% decline to 113.1m.

Average selling prices, another vital metric, slipped from €72 to €71, not disastrous, although also below analyst hopes of a rise to €74 following the launch of some high end models in the fourth quarter. Gross margins were down to 33.8% from 36.5% in Q3, in line with forecasts, and operating profit in handsets fell 70% to €766m. Any further erosion of Nokia’s enviable and closely guarded gross margin of 30-40% across its whole range would have been a key negative signal to the market.

Nokia Siemens Networks, the joint venture whose results are reported as part of Nokia’s, saw net sales of €4.3bn ($5.6bn), down 5% year-on-year but up 24% sequentially (down 4% and up 23% at constant currency). Predictions for cross-industry decline of 5% this year were maintained.

A rally in European stocks was reversed by Nokia’s news, with the pan-European FTSE300 index losing half its value. “Nokia’s numbers have ruined the party and pulled down the stock market,” a trader told Reuters.

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